Dangdang's 19 Years: A Story of Fighting Capital and Bubbles | QDaily Business History

Dangdang, a first-generation Chinese internet company founded in 1999, is being sold.

"When big money is being thrown around, winning readers and winning customers is innovation. Innovation is what can stand up to huge capital." Dangdang founder and CEO Li Guoqing said this at an event in late 2017.

After 19 years of running Dangdang, he no longer has to stand up to capital.

On March 9, Tianhai Investment, a company in the HNA Group, announced that it was in talks to buy Dangdang and was restructuring its assets as a result.

Where Dangdang will end up is still unclear, and the company has issued no statement denying that the deal exists. Li Guoqing and his wife and co-founder Yu Yu have both raised several possibilities.

Whichever one it is, the two of them — who started Dangdang in 1999 and now hold 93.17% of it — are about to cash out and leave.

On March 11, Li Guoqing posted a set of old photos on Weibo with a line from Ashes of Time: "Alone between heaven and earth, I go my way; the world's affairs fade into mist." He added, "Here's to Dangdang, the cultural e-commerce unicorn, daring to act and daring to be Dangdang." It already read like a goodbye.

On March 13, Yu Yu, Li's wife and a co-founder and major shareholder of Dangdang, wrote in a later post that "Dangdang's prefix and suffix don't have to carry Guoqing's name or mine forever."

According to an earlier Reuters report, HNA valued Dangdang at $1.2 billion to $1.5 billion — about three times the price at which Dangdang went private and delisted in 2016.

Like every internet business, Dangdang started on venture money — and its caution carried it through the 2000 dot-com bust

1999 was the year Chinese e-commerce began. Alibaba was founded that year too, though it started as a wholesale trading middleman.

Li Guoqing and his wife decided to start a company. Li, who came out of the book trade, became CEO; Yu Yu, who had a Wall Street background, became chairwoman. Dangdang was founded at the end of 1999 and began operating in 2000.

In a 2009 interview, Yu Yu said Dangdang had plenty of cash and was not considering an IPO. Looking back at the early days, she said the goal was an online store consumers would actually want to buy from. From the start, Dangdang's story was building an Amazon in China — Chinese consumers would be able to buy anything in one online store. If you wanted to look at skirts, you would see every skirt in one place, instead of doing what you do in a physical store: going through one brand's shelves, then moving on to the next brand.

Like Amazon, Dangdang started with books. No other product comes in so many varieties, ships so easily, and — unlike clothing — is so rarely sent back, all of which suits a business unconstrained by shelf space.

By the time Dangdang launched, the market already had a "giant": 8848.

In the "72-Hour Internet Survival Experiment" of summer 1999, 8848 was the only site where the participants could really buy something and pay for it online.

Open the 8848.net homepage and you'll find early versions of almost everything e-commerce has talked about in recent years. The "every category" strategy JD.com only began preaching in 2009 was already roughed out on 8848 in 2000. At the top of the page sat the same book business Dangdang was in; below it, the software-disc business of 8848's major shareholder, Lianbang Software; scroll further and you'd hit the appliances JD.com would later grow up on, plus all sorts of clothing and cosmetics.

China Merchants Bank, only a few years into issuing credit cards, even put out an 8848 co-branded online payment card. An ad for Tencent's QICQ (QQ's earlier name) ran at the bottom of the homepage, calling it a "Chinese-language internet pager."

8848 began as the e-commerce division Lianbang Software set up in January 1999. Six months later the division was spun out as 8848 the company.

By the end of 1999, 8848 delivered in 450 cities. By early 2000 its monthly sales topped 10 million yuan, and it sold tens of thousands of items across 16 categories, from books and software to computers, appliances and audio-video products. Time called it "China's hottest e-commerce site."

Dangdang and 8848 were direct competitors, and in 2000 there was even a farcical hacking episode. Li Guoqing said 8848 had hacked Dangdang; a month later Dangdang accused 8848 of poaching its people, saying it had called 18 of its department managers.

In the coverage of the day, 8848 was the online supermarket and Dangdang the online bookstore.

Every internet company then started on venture money. As Li Guoqing tells it, companies raising $10 million or $20 million were everywhere; he took less because he didn't want his stake diluted. Dangdang's first round of $6.8 million was meant, according to its business plan, to last three years.

8848 was more aggressive. In 2000 it launched a flower-delivery "O2O" business, covered every category, and bought ads to pull in users as it prepared for an IPO. Yet an ad panel on its own site was offering an Acer computer at a "special price of 19,600 yuan" — a measure of how small the internet still was, a market of 4 million users nationwide, all of whom had to sit down and plug in a cable to get online.

That generation of internet companies was losing money and had no hope of listing on China's A-share market, so they all aimed at Nasdaq. The three big portals — Sina, Sohu and NetEase — went public one after another, catching the same wave of Chinese listings in the U.S.

The e-commerce companies missed it. By the summer of 2000 the dot-com bubble had burst, internet companies on Nasdaq were failing in droves, and the banks that had taken them public were punished for misleading investors.

8848 split in two because its shareholders couldn't agree, and over the next few years it kept changing direction.

It never got another chance to become a consumer e-commerce giant. The name 8848 vanished early from the history of the Chinese internet.

Alibaba got its money in before the bubble burst. In Dangdang's second year, Chinese internet companies collapsed in large numbers. But Yu Yu had set aside cash in advance to carry Dangdang through the winter.

Dangdang did lose a wave of executives, until only Li Guoqing and Yu Yu were left. At the same time, investors were pushing internet founders out all over the industry: Wang Zhidong left Sina, Wang Juntao left 8848, both under pressure from capital.

For the next dozen years and more, Li Guoqing and Yu Yu kept control of the company firmly in their own hands. It is hard to argue those early years had nothing to do with it.

SARS became an opening for every e-commerce company — but Dangdang, afraid of losing control, turned down the chance to be Amazon China

Li Guoqing called the first internet winter Dangdang lived through "a winter for capital, a spring for consumption."

Dangdang's sales kept doubling year after year.

But the ground under e-commerce was still thin. People had only just learned to read the news and send email online. As Li Guoqing put it later: "Only after the ad-funded portals had made enough money were people willing to accept buying things online — that's when the e-commerce market started to mature."

"So in our first five years we didn't burn cash. We couldn't. Even if investors had wanted us to burn cash, I wouldn't," he said.

Without throwing money at growth, Dangdang passed 100 million yuan in sales in 2003.

During the SARS outbreak, when the couriers stopped running, Li Guoqing led Dangdang staff out to deliver orders himself.

Looking back, the SARS months of 2003 were a turning point for every one of today's Chinese e-commerce giants.

That was when Liu Qiangdong realized he could sell things online. He had 13 physical stores at the time, and with nobody going out to shop he lost more than 8 million yuan in 21 days. A single post on an online forum brought him six orders in a day. By the end of 2003 he had closed the stores. The next year JD Multimedia went online — the beginning of today's JD.com.

Jack Ma pulled a team out during SARS and shut them away to build in an apartment at Hangzhou's Lakeside Garden. In July 2003 Alibaba's consumer business went live: Taobao had arrived.

In 2004, Amazon had survived the dot-com bust in the U.S., proved it could make money, and pushed out from books into just about every category that could be bought online. As it worked out how to enter China, it went to Dangdang first about an acquisition.

Li Guoqing recalls that of all the strategic investors, Amazon put the highest value on Dangdang and was ready to pay $150 million to buy the company outright. Sina chairman Wang Yan rushed to Li Guoqing and Yu Yu's home that night to urge them to take the deal. But the two sides could not agree on the shape of it: Li wanted Amazon to take 30% to 40%, with Dangdang listing and growing on its own.

Amazon's answer was that anything under $1 billion was negotiable — $200 million, $300 million — but it had to hold 70% and absolute control.

Dangdang turned Amazon down, and Amazon bought Joyo instead for $75 million. In Amazon China's first years, Dangdang was its biggest competitor.

In 2004, eBay had not yet left China and Amazon China was only starting out. Dangdang closed its third round, from Tiger Fund, and Li Guoqing used the moment to lean on the board, threatening to resign unless it gave the founders absolute control.

When Hu Yaobang's daughter published her first book in 2005, Dangdang's first-day sales were quoted alongside those of Beijing's Xidan Book Building and SDX Joint Publishing to show how well it was selling. By then Dangdang's book sales had become a benchmark.

Dangdang executives spent those years pointing out that the company's annual sales had passed the Xidan Book Building's in 2004, and in an interview from the same period Yu Yu answered a question about counterfeits by saying Dangdang was not Silk Street Market.

No new internet company today would compare itself to a single store or a single street.

Amazon China, built on Joyo, never caught Dangdang, and it ran up huge losses for its parent. By the time Jeff Bezos discussed Amazon China at a conference held by the tech outlet Recode in 2015, he was summing up why it had failed.

JD.com, whose way of selling was closest to Dangdang's, used capital in exactly the opposite way

In a recent Weibo post, Li Guoqing insisted: "Dangdang, with 10 billion yuan in sales, makes a better profit than companies with 100 billion in sales."

Dangdang has been saying this for close to a decade.

Li Guoqing once recalled: "In the first five years we fought Taobao, in the second five years Amazon, and in the third five years JD.com. What little money I had, I wasted on price wars!"

Even while spending heavily on price wars, Dangdang stayed careful with its money.

It did not announce a profit until 2009. But its strategy was always the same: don't lose too much.

Yu Yu had done the arithmetic precisely: "From the day we started we took a cautious, break-even growth strategy. We lost money for nine years, but always only a little — 12% of total sales — and in exchange we got 100% growth. I've always believed I don't want 200% growth, because that means losing 18%; 300% growth means losing 24%, which wipes out the entire gross margin."

JD.com is the rival outsiders — and Li Guoqing himself — have compared to Dangdang most often over the years. Their price war ran right up to JD.com's IPO.

But where Dangdang held on to control, JD.com later proved far more willing to give up equity to grow faster.

JD.com launched in 2004 and did not take its $10 million round from Capital Today until 2007. That didn't stop it from pouring all its revenue into getting bigger.

It is hard to imagine now, but in 2008 JD.com's sales were only 75% of Dangdang's.

In the years after the financial crisis, when capital was shoving its way into China's internet market, JD.com went from small to large on the strength of it.

Under its strategy of not losing too much, Dangdang chose to skip businesses that would eat capital. Logistics is the clearest case: JD.com began building its own network in 2007 and only spun it off in 2017, to make its accounts look better. Li Guoqing said Dangdang would leave delivery to the courier companies that had grown up alongside it, and would not go after markets below the second-tier cities.

JD.com started in 3C electronics, then moved into small and large appliances. Its cosmetics channel opened in 2009, and after that its expansion into new categories sped up.

Dangdang began signaling in 2009 that it would add categories, and it wrote its plan to raise the share of general merchandise into the prospectus for its U.S. listing.

Just before Dangdang's IPO, JD.com opened a books channel — Dangdang's strongest category. Two companies that had barely competed head-on went to war on price.

Everything Dangdang wouldn't do for fear of burning cash, JD.com did. And JD.com had more cash to burn.

The numbers: from launch to listing, Dangdang took 11 years and raised $44 million. JD.com took 10 years and raised nearly $3 billion.

Dangdang went public in 2010. On the first day of trading its shares closed more than 80% above the offering price, and it raised $276 million. Chinese stocks were doing well in U.S. markets then, and with Amazon as the comparison, Dangdang's shares were not hard to sell.

JD.com's price war started with books, Dangdang's strongest category. Li Guoqing's verdict at the time: "The market as a whole is huge — 3C and books are still a tiny share of online shopping. I don't know why he decided to attack my books category. It shows neither strategy nor sense."

JD.com and Tmall have spent the last couple of years forcing clothing brands to choose one platform or the other. Dangdang did the same thing to publishers back in 2012.

Yu Yu said the money would go into a "low book prices strategy." Li Guoqing, interviewed on the day of the listing, said the biggest thing going public gave Dangdang was cash — cash to guarantee low prices and answer any price war at any time. "We will hit back at any competitor in any price war," he said.

That pushed Dangdang, already profitable, back into losses from 2011. Public now and answerable for its accounts, it could not tell American investors a convincing story about trading losses for growth. Its stock fell below the offering price in 2011 and never recovered.

While the platform companies were adding categories, a wave of vertical e-commerce companies went under. The mother-and-baby retailer Redbaby was bought by Suning; Vancl's IPO failed; Gao Shenghan, secretary-general of the Shenzhen E-commerce Association, told reporters that at least 400 to 500 Shenzhen companies shut down or left e-commerce in 2010.

By iResearch's count, the largest B2C online retailer in 2011 was Tmall; JD.com was a third of Tmall's size, and Dangdang close to a tenth of JD.com's.

The logic JD.com sold to capital markets was much like Amazon's in its early years: profit is not the most important number; revenue growth and cash flow usually matter more.

JD.com bought goods from suppliers and sold them on. Consumers paid at once, while JD.com could take weeks, even half a year, to settle with its suppliers.

The faster it sold and the longer it delayed payment, the more money it had to work with. Even with some losses, as long as it kept growing, the cash would not run out.

Plenty of companies that tried this model collapsed, of course — most e-commerce companies eventually closed or sold themselves.

JD.com didn't. It kept getting investment.

At an e-commerce summit in 2015, Li Guoqing took a shot at Liu Qiangdong from across the room: "Very few people in China have President Liu Qiangdong's luck — investors will hand him $2 billion to lose. He's just too lucky!"

It was not only luck. Tencent's support mattered too.

How much Tencent mattered to e-commerce only became clear once smartphones arrived.

Once shopping moved to phones, which platform people bought from became a zero-sum game. It was no longer a matter of opening a page in a browser and placing an order; shopping on a phone generally meant installing an app, or buying somewhere with heavy traffic, like WeChat. Most people won't install a pile of apps, so in e-commerce the big kept getting bigger and the small kept getting smaller.

Dangdang's app didn't appear until 2011, and its use rose and fell with promotions; it never became the leader. Even when it did spend, at most it "spent two for every one it earned." Over the following years — O2O, cross-border shopping, today's new retail — a crowd of startups raised rounds of more than 100 million yuan and burned through them in months.

Of the companies capital force-grew, few were left standing.

JD.com wasn't doing especially well on phones at first either, but it tied itself to Tencent. Looking back on turning down an acquisition offer from Tencent, Li Guoqing said he had "underestimated the power of WeChat."

An exit that is not without dignity

In 2014 Dangdang's growth slowed, but it returned to profit: net income of 88.12 million yuan on sales of 7.96 billion yuan.

Capital markets cared more about who would win China's e-commerce market, and JD.com and Alibaba, which listed one after the other in 2014, both looked more like China's Amazon than Dangdang did. JD.com's revenue that year had already passed 110 billion yuan.

The money going into Alibaba and JD.com did not stop when they listed. JD.com kept taking investment from Tencent afterward, and Liu Qiangdong's stake was overtaken by Tencent's in 2016. Alibaba, meanwhile, issued bonds and took loans in several rounds over three years, raising more than $10 billion in total — the money that later paid for its stakes in one offline retailer after another.

As the Strategic Emerging Industries Board, which promised a lower bar for listing, was proposed in 2015, Li Guoqing and Yu Yu made a privatization offer that year and took Dangdang off the market.

The two founders and the shareholders went several rounds over the price. Shareholders finally accepted $6.80 a share, about half the acquisition price now being reported. Four years after arguing publicly with investment banks about an IPO priced too low, Li Guoqing and Yu Yu got to 93.17% ownership by pushing a price down themselves.

Not long after the IPO, early shareholders including Tiger Fund and DCM had already sold out.

You can see where the couple's distrust of capital comes from in the 2010 Weibo shouting match between Li Guoqing and a Morgan Stanley banker known online as the "Morgan Stanley girl."

Looking back later, Li Guoqing said he regretted going public. He called it a mistake. "Once you're listed, all kinds of demands for profit come at you, you can't take losses, and your hands are tied — but in a fast-exploding industry the necessary losses are necessary," he said.

No longer obliged to publish financials, Dangdang went back to being a bookstore, online and off.

At the end of 2015 Dangdang said it would "counterattack offline from online," opening 1,000 physical bookstores in three to five years. In 2016 it formally recast itself as a cultural e-commerce company, and most of Li Guoqing's Weibo feed became photos and addresses of new Dangdang bookstores around the country.

In 2017 Li Guoqing announced that the more than 100 stores Dangdang had opened were "not losing money."

In 2018 Dangdang opened a flagship bookstore in Chongqing. The bigger change was internal: Dangdang's new-business group was broken up and parceled out to smaller teams. Li Guoqing, who had run that group directly, was left in charge only of the public affairs division, while self-publishing and the physical bookstores began reporting to Zhang Wei, assistant president of the former new-business division.

For a long time Li Guoqing took pride in how much say Dangdang had in the book industry. A company that never meant to be only a bookstore had come back to where it began: selling books.

"A change at the equity level reflects the fact that our era has more and more options. Even if Dangdang's ownership changes, the new shareholders bear no grudge against money — they'll want Dangdang to do well too," Yu Yu wrote on March 13.

By then Dangdang had been in business for 19 years, with roughly 10 billion yuan in annual sales, net profit around 100 million yuan, and 1.189 billion books sold.

In an industry that changes its hot trend every year and burns cash for growth, that counts as a dignified ending.

Charts by Xiuxia Feng

Chart data compiled by Yang Kuan

Cover image from Visual Hunt